Making Sense of Medicare, Medicaid can be tough.

By Jessica T. Fehr, Esq.

I. The Basics

For practitioners who don’t regularly deal with Medicaid and Medicare in their practices, the first real exposure to the two programs can be confusing. Medicare and Medicaid were both first authorized in 1965 by Title XIX of the Social Security Act.

Medicare is a federal insurance program for individuals over age 65; younger people with disabilities; and individuals with end-stage renal disease. Medicare consists generally of four parts: Part A covers inpatient care including skilled nursing and hospice; Part B covers outpatient services and medical supplies; Part C covers Medicare Advantage Plans; and Part D deals with prescription drug coverage. Medicare is run by the Centers for Medicare & Medicaid Services (CMS), a branch of the Department of Health and Human Services. Medicare is funded through two trust funds held by the U.S. Treasury.1 In 2015, the Medicare program spent approximately $620 billion.2 In 2016, an estimated 37 million people were enrolled in Medicare nationally.3 Montana had approximately 167,000 Medicare enrollees in 2016.4

On the other hand, Medicaid is a joint federal and state program that receives roughly 66 percent of its funding from the federal government and 34 percent from the state governments. The funding percentages vary depending on the type of services covered and federal directives for coverage.5 Medicaid is designed to help individuals with limited income and resources, including programs focused on disabled people, pregnant women, the elderly and children. Medicaid also offers some coverage for other benefits, not usually covered by Medicare, like nursing home care and personal care services.6 In addition to monitoring Medicare, CMS also monitors Medicaid programs offered by each state. In 2015, it was estimated Medicaid nationally spent in excess of $532 billion and Montana in excess of $1 billon.7 In 2017, it was estimated that 69 million people were enrolled in Medicaid nationally.8 As of January 2017, Montana had 246,548 individuals enrolled in Medicaid and the Children’s Health Insurance Plan (CHIP).9

Montana’s Department of Public Health and Human Services (DPHHS) manages the Montana Medicaid Program and is tasked with adopting appropriate rules to administer the program and ensure its compliance with federal laws and regulations. The Montana Medicaid Program is administered under Montana Code Annotated § 53-6-101. In response, DPHHS has adopted rules found in Title 37 of the Administrative Rules of Montana (ARM) for managing and monitoring the Montana Medicaid Program.

II. The Recovery Audit Contractors

The Affordable Care Act contained provisions that amended the Social Security Act and established that states and territories had to develop Medicaid Recovery Audit Contractor (RAC) programs. The purpose of the RACs is to identify overpayments and underpayments and to recover overpayments from Medicaid providers.10 RACs work in conjunction with Medicaid Integrity Contractors and, when fraud is identified, the appropriate state’s Medicaid Fraud Control Unit. RACs are paid on a contingency fee basis. The amount of the contingency fee is a percentage of the improper payment recovered from providers. The base contingency fees range from 9 percent to 12.5 percent for all claim types, except for claims related to durable medical equipment (DME). The contingency fees for DME claims range from 14 percent to 17.5 percent. The RAC must return the contingency fee if an improper payment determination is overturned at any level of appeal – meaning RACs get paid prior to the exhaustion of a provider’s appeal in the process.11 DPHHS has contracted with Health Management Systems (HMS) to act as its RAC since December 15, 2012.12 HMS is a wholly owned subsidiary of HMS Holdings Corp. HMS is publicly traded on the NASDAQ as “HMSY”.13

Currently, three issues are approved in Montana for RAC review: (1) inpatient hospital reviews – appropriateness of setting; (2) long-term-care-facility reviews; and (3) hospital readmissions within 24 hours.14 Once the RAC has identified a situation where it believes a provider has been paid too much for the services rendered (an overpayment), the provider is notified and given the option to request an administrative review of the alleged overpayment. An administrative review allows either a review of the already submitted records and any new records that may support the provider’s case or a telephonic “desk” review where the provider can speak with a representative about the audit and discuss the objections to the audit. If the provider loses at the administrative review stage, the provider may make a fair hearing request, where the process is elevated to Montana’s administrative law judges and the overpayment demand is prosecuted by attorneys with the Montana Attorney General’s Office.

III. Clinical v. Billing.

With respect to reviewing the appropriateness of inpatient hospital stays, there seems to have been a flurry of activity over the last 12 to 18 months in Montana. These reviews focus on whether the treating physician’s decision to admit a Medicaid patient as an inpatient, rather than as an outpatient with observation status, was medically necessary. One might ask if there is a distinction with a difference between an inpatient admission and outpatient with observation status. The answer is emphatically yes – in some cases the reimbursement rate for an inpatient admission can amount to more than triple the reimbursement rate for an admission to outpatient observation status. This is an obvious reason for the inclusion of the issue on HMS’s approved issues for review.

The ARM provides that Medicaid shall only make payment for services that are “medically necessary.”15 A “medically necessary” service is defined as: “A service or item reimbursable under the Montana Medicaid program which is reasonably calculated to prevent, diagnose, correct, cure, alleviate, or prevent the worsening of conditions in a patient, which endangers life, causes suffering or pain, results in illness or infirmity, threatens to cause or aggravate a handicap or causes physical deformity or malfunction.”16 It is also clear from the regulations that the physician or other medical provider is responsible for deciding whether the patient should be admitted as an inpatient.17 The real distinction between inpatient and outpatient admission status seems to be whether the care the patient received should have, in hindsight, been provided as effectively, in a more conservative or substantially less costly manner in an outpatient setting.18 Either way, the patient is admitted to the same hospital bed and treated as required by their condition upon admission and their co-morbidities. The designation as inpatient simply ensures that the hospital is paid for the higher level of care the patient will require during the stay.

The basis for each of the RAC’s overpayment demands is that the facility was overpaid because less intense services would have been more appropriate. The RAC typically attacks the provider’s medical judgment and argues that the procedures, testing, consults and monitoring offered to the identified patients could have been safely performed with the patients designated as outpatients with less monitoring and hands-on care from medical providers and staff. However, there is no clear statutory or regulatory definition that defines what care qualifies for the outpatient setting and what care is most appropriately administered as an inpatient. It could be argued that no such guidance exists because the treating physician who physically sees the patient should be the one to determine what is medically appropriate and necessary. Instead, the current RAC audit system uses experts who review records in retrospect for a company that profits directly from overpayment demands.

The current structure employed by Medicare and Medicaid to review medical billing to federal programs encourages duplicative work by the various private contractors and incentivizes aggressive identification of overpayments without support from the patient records. That is not to say that overpayments don’t occur or that some providers don’t take advantage of the programs. However, experience dictates it is a small percentage of the whole. Fiscal responsibility should be weighed against the growing and erosive nature of the aggressive and time-consuming billing and auditing requirements of third party payors like insurance companies and Medicaid. The most recent, large-scale and sweeping changes in the federal regulatory landscape have only added to the pull on medical providers away from a focus on providing holistic, quality patient care and onto the new and additional 60,000-plus ICD-10 diagnosis codes, ever expanding CPT codes and RAC-approved issues for review. An improved audit system should be sought in which providers can again be clinicians first and medical coding experts a distant second.

1See generally, (last visited April 14, 2017, 2022).
2See (last visited April 14, 2017, 2028).
3See Dashboard.html (last visited April 15, 2017, 2300).
4See Dashboard.html (last visited April 14, 2017, 2100).
6See (last visited April 15, 2017, 2009).
7See spending/?currentTimeframe=0&sortModel;={"colId":"Location","sort":"asc"} (last visited April 14, 2017, 2100).
8See (last visited April 15, 2017, 2012).
9See (last visited April 15, 2017, 2200).
10See (last visited April 17, 2017, 1034).
11See (last visited April 17, 1426).
12See (last visited April 17, 2017, 1033); (last visited April 10, 2017, 2300).
13See (last visited April 12, 2017, 2210).
14See (last visited April 17, 1117).
15See Administrative Rules of Montana § 37.85.410.
16The Montana Medicaid Hospital Inpatient Services Manual, dated December 2010, Appendix B.1; ARM § 37.82.102(18).
17ARM § 37.86.2901(26) and (27).
18The Montana Medicaid Hospital Inpatient Services Manual, dated December 2010, Appendix B.1; ARM § 37.85.410 (Determination of Medical Necessity).

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